The crazy math of health-care reform

A new program for long-term care is billed as a money saver. In fact, it does just the opposite.

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By Shawn Tully, editor at large

Shawn Tully, Fortune editor at large
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NEW YORK (Fortune) -- This is the sixth installment in a series of health-care columns by Fortune's Shawn Tully.

Embedded in the health-care plan moving forward is a truly gravity-defying new device: a costly entitlement program portrayed as a way to save money. So how can you raise billions with a program that can't even pay for itself? Only by using the crazy math that governs in the world of health-care reform.

The gimmick was hatched on July 15 when the Senate Committee on Health, Education, Labor & Pensions approved a federal insurance plan for long-term care called the Community Living Assistance Services and Supports Act, or CLASS Act.

The plan, which would provide modest benefits to people who can't perform such simple daily tasks as bathing or feeding themselves, was one of Sen. Ted Kennedy's last crusades. It quickly became a favorite among Democrats, who are now adding the CLASS Act to the leading proposal in the House, H.R. 3200, passed by the Energy & Commerce Committee.

While no one doubts the bill's humane intentions, its ardent champions have another motive as well. A budget gimmick allows them to claim that CLASS Act helps pay for health-care reform.

The Democrats are promising a "deficit neutral" plan, which means that according to rules set by the Congressional Budget Office, they need to find about $1 trillion in new taxes and savings over the next ten years. Right how, the House legislation stands around $250 billion short.

The CLASS Act looks like a gift: It brings in $58 billion in net tax revenues by 2019, lowering the deficit by an equivalent amount because only minor costs will be booked during that period. Under the CBO rules, the CLASS Act technically covers one-quarter of the $250 billion shortfall in funds needed to pay for health-care reform.

The gimmick lies in looking only at the CBO's ten-year budget window. The extra revenues are an illusion because of the disaster lurking just beyond that horizon.

In fact, none of the $58 billion is available to pay for the House bill. The CLASS Act is so poorly designed that the $58 billion reserve and all future premiums won't come close to covering the generous benefits it's promising.

Here's why the mechanics of the CLASS Act assure its eventual collapse.

Under the bill, all working Americans would have the option of contributing a payroll tax averaging $65 a month for long-term care. The eventual benefit for most recipients would be $75 a day or $27,000 a year.

It could be used towards nursing-home expenses, but the main goal is to allow infirm Americans to get the care the need from aides or therapists in their own homes so they're not forced into nursing homes.

But the CLASS Act's premiums aren't remotely high enough to cover a likely deluge of claims. "It's a microcosm of many of the weaknesses in the health-care reform bills," says Steve Schoonveld of the American Academy of Actuaries (AAA), which did an excellent analysis of the CLASS Act.

The plan's main problem is that it encourages what's known as "adverse selection" -- it will attract an extremely high proportion of people who are sick and near retirement, and a relatively small share of the young and healthy needed to create a sound insurance plan.

One big weakness is that the CLASS Act doesn't screen for medical problems, or even require information about them. Hence, workers or their spouses can sign up even if they're already ill. By contrast, private plans require strict testing.

Participants in the CLASS program can also start collecting benefits after just five years, a period the AAA deems far too short. Workers and their spouses can also stop paying premiums, then rejoin when they get sick with no penalty.

As a result, the AAA expects that the plan will be swamped by people who know they have medical problems when they sign up, and demand benefits right after they've paid for five years.

The AAA says that the plan would become insolvent by 2021 -- just beyond the CBO's budget window -- and would have to raise its premiums to $180 a month to meet its costs, a 177% increase.

That would put the CLASS Act into a death spiral, since virtually all younger and even moderately healthy participants would drop out. It would become a program exclusively for the old and sick, driving premiums still higher.

The most likely outcome is that we'll never get to the $180 premiums needed to fund the plan. Congress will be forced to pay enormous subsidies to keep the premiums low enough to encourage young and healthy people to sign up. Pressure will also be intense to raise the benefits to pay for more nursing-home expenses.

Instead of funding the shortfall in the House bill, the CLASS Act will create a giant budget shortfall of its own. Unfortunately, gimmickry like this is the kind of thing that has fanned public fears about health-care reform doing more harm than good.

Read Shawn Tully's other installments in this series:

White House drug deal won't save money

4 hidden costs of health care

Obamacare could cost you $4,000 a year

Don't like Obamacare? Here's an alternative

Designing the ideal health care system  To top of page

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